Mid-cap stocks could be the Goldilocks segment of the market for many investors: bigger than the sometimes risky, often volatile small-cap end of the pool, but smaller and more agile than the more lethargic large-cap end.
While mid-cap stocks between $2 billion and $10 billion can certainly be both risky and slow-growing, they have often established themselves enough to generate sufficient sales and profits that put them on a firmer foundation. Fortunately, there are still opportunities to grab from growth ahead of them. The three mid-caps below give investors a chance to strike the right balance between risk and reward.
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Ready for Cannabis 2.0
The first year of legal marijuana in Canada has been a rather rough one for Canopy Growth (CGC 3.65%) and other pot producers, but the advent of Cannabis 2.0 up north, or the legalization of cannabis derivatives products, has many expecting year two to be less of a buzzkill.
Canopy Growth is arguably positioned to capitalize on this next phase of legalization because it has one of the broadest suites of products ready for the market. Included in its portfolio are several lines of CBD- and THC-infused beverages, cannabis-infused chocolate, and even vape pens and cartridges.
The market saw fit to take down the entire segment this year as the rollout of marijuana legalization was met with bureaucratic snafus because of an overwhelming crush of applications. The delays have hurt sales for producers, and some companies saw their stocks lose three quarters of their value or more.
Canopy didn't escape the carnage, and shares are down 62% from their 52-week high. However, many view Canopy as the strongest of the players, and with financial backing from Constellation Brands, it has a better chance than many of bouncing back sharply in 2020.
Mop up with a rebound
Shares of industrial maintenance and supply organization HD Supply (HDS) have traded in a fairly narrow range for the better part of the year as the market remains concerned about slowing growth in a cyclical business.
Whereas it benefits from various multiyear construction projects already under its belt, industrial activity is decelerating, according to the Institute for Supply Management, whose national factory activity index dipped again in November to 48.1. A reading below 50 indicates contraction in the manufacturing sector.
However, sales at HD Supply are still growing despite the market volatility, and business sentiment will improve now that the first stage of a trade agreement with China is being negotiated.
The big news, of course, is that HD Supply plans to split itself into two separate publicly traded companies, one focusing on facilities maintenance and the other, construction and industrial. The former will be renamed HD Supply Facilities Maintenance, with approximately $3 billion in net sales; the latter will be called Construction & Industrial White Cap and expects similar revenue. The deal is expected to be completed by the middle of fiscal 2020.
Investors would be getting a leading player in two spaces trading at a discount to rivals Fastenal and MSM Industrial Direct, with an economy that might not be ready to creak to a halt just yet.
The grass is greener
Unlike Canopy Growth and HD Supply, shares of leading lawn care products specialist Scotts Miracle-Gro (SMG 1.57%) have not been beaten down in 2019. In fact, they've gained almost 75% this year, which might have some thinking it's approaching the end of a bullish period. That may be premature.
Although lawn care provides the bulk of Scotts' revenue and profit, its hydroponic business is the faster-growing segment, and as it caters to the expanding legal marijuana market in the U.S., it has the potential to assume a much larger proportion of importance for the company.
Sales at Hawthorne, Scotts' cannabis subsidiary, grew 38% in the fiscal fourth quarter, with growth exceeding 50% in some west coast markets such as California. Although the segment experienced some hiccups following Scotts' acquisition of the business, it has since gotten it back on track, and Chairman and CEO Jim Hagedorn said Hawthorne's performance gives Scotts "a high degree of confidence as we look ahead into fiscal 2020."
It should give investors a degree of surety, too, that during the pot stock meltdown this year, Scotts Miracle-Gro was unaffected. Supplying the picks and shovels to whoever the miners are is still a smart way to play the market. And Hagedorn has promised to boost Hawthorne's profitability.
Don't discount the lawn-care business from sprouting further growth: It was only expected to see 1% to 2% gains this year, but Scotts bumped it up to 6% to 7% during the summer. It ended up reporting 8% growth for the full year.
Scotts Miracle-Gro isn't a cheap stock, but it still has the potential to grow like a weed.
